On June 6, 2022, the U.S. District Court for the Southern District of New York found that a contractual New York choice-of-law provision precluded a borrower-plaintiff from obtaining summary judgment on a usury claim brought under Texas law. The plaintiff was a small Texas business that provided golf course construction, development, renovation, and remodeling. Defendants were in the business of advancing funds to small businesses through so-called “merchant agreements.” The merchant agreements contained a New York choice-of-law provision.
When plaintiff was experiencing cash-flow issues, a broker offered financing through one of the defendants. Plaintiff entered into a merchant agreement with one of the defendants, whereby the defendant agreed to advance plaintiff $100,000 in exchange for the purchase of what was defined as all future receivables until the defendant was paid $149,900. Plaintiff made daily payments equal to what was calculated to be 10% of daily receipts and received $44,500, half of the purchase price (after taking fees into account). Although plaintiff requested the remaining advance be transferred, the defendants never transferred it. Nonetheless, plaintiff continued to make the daily payments, and by the next year, plaintiff had transferred almost $120,000 to the defendant. While plaintiff demanded that the excess amount be repaid, defendant never refunded the excess amount.
Thereafter, plaintiff commenced suit in New York state court, but defendants removed the action to federal court. Plaintiff alleged a violation of the Texas usury statute under the theory that the merchant agreement transaction was a loan and that the rate of interest was 400%, much more than twice the maximum rate of interest permitted by Texas law. Plaintiff moved for summary judgment on the usury claim. After finding the merchant agreement was a loan and not a true sale, the court turned to the usuary claim. Its analysis turned on whether the choice-of-law provision in the merchant agreement controlled, such that New York law was applicable. The court noted that the application of a choice-of-law provision to a usury claim can make a material difference to the success or failure of such a claim. If the usury claim falls within the scope of the choice-of-law provision, that will be respected and will be enforced unless the law chosen “bears no reasonable relationship to the transaction or the parties or if enforcement of it would be intolerable for the court.”
While the court found that Second Circuit law was not completely settled regarding whether a usury claim falls within a choice-of-law provision, it held that contractual claims fall within a choice-of-law provision but tort claims generally do not. Similarly, while the court observed that the caselaw is mixed on the issue, the court ultimately found the usury claim was contractual in nature and not a tort. Because the issue arose in connection with a summary judgment motion, the court could not say, as a matter of law, that the choice-of-law provision in the agreement was inapplicable to plaintiff’s usury claim and that Texas law should apply. Plaintiff was thus not entitled to summary judgment on its Texas usury claims.
The case is Fleetwood Services, LLC v. Ram Capital Funding, LLC, Case No. 20-cv-5120 (S.D.N.Y. June 6, 2022). Fleetwood Services, LLC is represented by White & Williams LLP. Ram Capital Funding LLC and the other defendants are represented by Jacobowitz Newman Tversky LLP and J. Iandolo Law, PC. The order is available here.
